Eastern District Of Pennsylvania: Closing Protection Letter Does Not Constitute “Insurance” For Purpose Of Statutory Bad Faith Claim In Pennsylvania

by Saul Ewing Arnstein & Lehr LLP

Bancorp Bank v. Lawyers Title Insurance Corp. , No. 13–6103 , 2014 WL 3325861 (E.D. Pa. Jul. 8, 2014).

Eastern District of Pennsylvania explains that while Closing Protection Letter may be an indemnity contract, it is not an insurance policy.

In February 2006, a borrower requested a loan in the amount of $1,750,000 from plaintiff Bancorp to finance the purchase of a commercial building located in Florida.  The loan application submitted to Bancorp listed the purchase price of the property as $2,100,000.  Based upon this purchase price, Bancorp agreed to lend the Borrower $1,750,000, approximately 83 percent of the purchase price. 

The next month, PA/NJ Abstract, Inc., the authorized Issuing Agent for Defendant Lawyers Title Insurance Corporation (“Lawyers Title”), delivered to Bancorp a commitment for title insurance for the principal loan amount of $1,750,000.  This title insurance policy covered Bancorp in the event of a loss.  The Issuing Agent also gave Bancorp a copy of a separate commitment for title insurance that was issued to the borrower insuring $2,100,000, the purported purchase price of the property.

Lawyers Title then issued a Closing Protection Letter (the “CPL”) to Bancorp in connection with the title insurance policy.  The CPL stated that Lawyers Title would reimburse Bancorp for losses incurred in connection with the closing of the real estate transaction under either of the following two circumstances: (1) “Failure of said Issuing Agent or Approved Attorney to comply with your written closing instructions to the extent that they relate to (a) the status of title to said interest in land or the validity, enforceability and priority of the lien of said mortgage on said interest in land, or (b) the obtaining of any other document, specifically required by you, but not to the extent that said instructions require a determination of the validity, enforceability or effectiveness of such other document, or the collection and payment of funds due you”; or (2) “Fraud dishonesty [sic] of said Issuing Agent or Approved Attorney in handling your funds or documents in connection with such closing.” 

Two years after Bancorp’s title insurance policy took effect, the borrower defaulted on the loan on the property.  However, upon investigation, Bancorp learned that Lawyer’s Title’s Issuing Agent prepared closing documents that falsely listed $2,100,000 as the purchase price of the property, while the borrower only paid $1,750,000.  Bancorp sent a claim (the “CPL Claim”) to Lawyers Title based on the Issuing Agent’s alleged fraud, a triggering event in the CPL that would require indemnification to Bancorp.  Pursuant to the CPL, Bancorp sought recovery on the grounds that it incurred a loss on the loan transaction as a result of the Issuing Agent’s fraud and dishonesty. 

Defendant Fidelity National Title Insurance Company (“Fidelity National”) handled Bancorp’s CPL Claim exclusively.  After the property was sold at auction for an amount less than the balance owed on the loan, Bancorp contacted Fidelity National and demanded compensation on the CPL Claim.  Bancorp alleged that it was entitled to recoup $1,511,083.19 from Lawyers Title based on the Issuing Agent’s alleged fraud in connection with the closing and loan transaction. Fidelity National refused to compensate Bancorp for the losses it allegedly suffered due to the fraud.

Bancorp then filed suit against Defendants in the Philadelphia Court of Common Pleas.  Defendants removed the case to the Eastern District of Pennsylvania, which in turn granted Defendants’ Motion to Dismiss on the claims of negligence and bad faith.  With regard to the bad faith claim, the question before the court was whether the CPL constituted an “insurance policy” under Pennsylvania law – a requirement for a bad faith claim.  The court agreed with the Defendants’ argument that the CPL was not an “insurance policy” and therefore the bad faith claim could not succeed.

The court first looked to Pennsylvania’s statutory definition of “insurance.”  While the term “insurance policy” is not defined in Pennsylvania’s bad faith statute, “title insurance” is described elsewhere as, in part, “insuring, guaranteeing or indemnifying against loss or damage suffered by owners of real property or by others interested therein by reason of liens, encumbrances upon, defects in or the unmarketability of the title to said real property; guaranteeing, warranting or otherwise insuring the correctness of searches relating to the title to real property; and doing any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this article.”  40 Pa. Stat. Ann. § 910–1(1).   In contrast, the court cited one treatise’s definition of a “closing protection letter” as “an agreement by a title insurance company to indemnify a lender, or  in some cases a purchaser, for loss caused by a settlement agent’s fraud or dishonesty or by the agent’s failure to follow the lender’s written closing instructions.” 

The district court further noted that courts appear to be divided over whether CPLs are entirely distinct instruments from title insurance policies. Looking to the law of other jurisdictions, the court acknowledged that one line of cases holds that CPLs, while related, are not the same as title insurance policies; nevertheless, other courts have held that because CPLs are so closely related to title insurance policies, both instruments may sometimes be treated as one and the same.

The district court ultimately relied upon a case decided by the Supreme Court of Alabama, Metmor Fin., Inc. v. Commonwealth Land Title Ins. Co., which addressed a similar factual scenario and found that a letter similar to the CPL did not constitute insurance.  The district court reasoned that first, while there was an insured/insurer relationship between the parties, that relationship arose from the title insurance policy (not the CPL).  Similar to the Alabama statute quoted in Metmor, Pennsylvania defines title insurance as protecting against losses which arise from liens, encumbrances, or defects which render title unmarketable.  In contrast, the CPL only protects against losses caused by: 1) the Issuing Agent’s failure to comply with Bancorp’s written closing instructions; and 2) the Issuing Agent’s fraud or dishonesty in handling Bancorp’s funds or documents in connection with the closing. As the court found in Metmor, the District Court found that the CPL was not a title insurance policy.  And, while acknowledging that the CPL may be an indemnity contract, the court held that since it was not an insurance policy, Bancorp could not maintain its bad faith claim.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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